How Commodity Trading Differs from Stock Trading

There are major differences between trading stocks and trading futures. While stories of fortunes made or lost overnight on the futures markets are largely untrue, the futures trader, if using a sound trading system, can usually make more money on the futures market and make it much faster. However, if that trading system is not sound the trader can have greater losses.

This is because futures contracts are highly leveraged. Margins (the deposit required) on futures contracts are much less than for stocks, as low as 3% on some futures contracts compared with up to 50% for stocks. As well, futures investors are not charged interest on the difference between the margin and the full contract value.

The margins for futures contracts act more as a performance bond or good faith deposit whereas the margin for stocks is more of a loan. Although the margin on futures contracts is quite small, it rides the full value of the underlying contract as that contract rises or falls, thus providing the leverage mentioned earlier.

Commissions charged by futures brokerages are normally much less than brokerage commissions for other investments.

Futures markets use the open outcry (auction type) method of trading ensuring very public, fair, and efficient markets. Plus, it is much harder to trade on inside information as so many variables affect the markets. Also, futures markets are very liquid. Transactions can be completed quickly, which lowers the risk of adverse market moves

If you own stocks you are an owner of the company. This allows you to share in the company's profits, and losses, through dividends, and increases or decreases in the stock's value. It also gives you certain voting rights with the company. However, a company can go bankrupt, leaving you holding worthless stock.

When you buy and sell futures you are only entering into a contract and don't really own anything. What you have is an agreement to buy a commodity or financial instrument (wheat or Treasury Bonds for example) at a specified price at a certain date in the future.

The person on the other side of the transaction has agreed to sell you that commodity or financial instrument at that specified price by the specified date. If you sell a futures contract prior to that date you have offset your position and have either a profit or loss on the trade.

The stock you bought 3 years ago is the same stock you can buy today. Futures contracts, on the other hand, have very limited lives. They are traded in a regular series of contract months referred to as delivery months.

Futures contracts have expiration dates after which no further trading for that month can take place. The September corn contract you traded last year is not the September corn contract you are trading this year. In fact last September's corn contract no longer exists.

Many futures contract months of the same commodity trade simultaneously on the market, sometimes even years into the future. The current contract is called the front month and the other contracts are called the back months. They are called back months even though they are for future months.

For example, corn trades for the months of January, March, May, July, September, November and December. Suppose today's date is August 4, 2000. The current contract month for corn would be September 2000 and so is called the front month. The months of November and December 2000, January 2001, March 2001, May 2001 and July 2001 are back months even though they are in the future and even flow into the next year. (This may sound confusing but its not ...really)

All of these months can be traded at the same time although most of the trading activity takes place in the front month.

When the current month expires the next contract month becomes the front month and so on.

Rob Hall is a successful futures trader, President & CEO of his own investment firm, and international author. His books on learning to trade futures markets are distributed through Sumas International Sales Ltd. View them athttp://www.futuresopps.com/Comm.htm

New investor email lists and leads posted - including active real ... PR Web (press release), WA - Aug 20, 2008 ... finance executives, owners of tax free investments, Canadian investment responders, individuals interested in stocks, mutual funds, rare coins, ...

Investing early is best strategy Miramichi Leader, Canada - Aug 19, 2008 You can invest in equity in many ways: stocks, mutual funds, indexes or private companies. Yes, there are risks, but there is also the potential for greater ...

SEC Weighs Overhaul of 'Index' Annuities Wall Street Journal - Aug 16, 2008 But the SEC wants indexed annuities to be considered "securities," just like stocks, mutual funds and even variable annuities. ...

But spend wisely, says financial planner Belleville Intelligencer, Canada - Aug 19, 2008 "You are insulating yourself from the adversity of the economy if you invest in stocks, mutual funds and, of course, an emergency savings account. ...

Money Tip: ETFs stable in turbulent markets Baxter Bulletin, AR - Jul 25, 2008 Trading in exchange-traded funds has been stable and strong despite recent troubles in financial markets. Like mutual funds, ETFs are single investments ...

Ibbotson Selected by ING Financial Advisers to Create Model ... MarketWatch - Aug 13, 2008 Morningstar provides data on more than 280000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 18 ...

Easy-to-Use Solution Allows Retirement Plans to Offer Allocation ... MarketWatch - Aug 6, 2008 Morningstar provides data on more than 270000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 18 ...

Banking crisis a surprise most saw coming The Age, Australia - Aug 5, 2008 And, as the FDIC site explains, it does not insure investments held in banks such as bonds, stocks, mutual funds, life insurance policies, or municipal ...

Morningstar Announces Two New Fund Categories, One Broad Asset Class MarketWatch - Aug 5, 2008 Morningstar provides data on more than 280000 investment offerings, including stocks, mutual funds, and similar vehicles. The company has operations in 18 ...

Los Angeles Times

Should you buy a home now? Los Angeles Times, CA - Aug 3, 2008 But renters can take the money they would have spent on a down payment and invest it in stocks, mutual funds or other investments (20% down on the ...